How the Tony Abbott-Joe Hockey war cabinet hatched their strategy

Budget politics for the past six years has been about spending. Voters were constantly told that Labor was spending like drunken sailors.

But what repeatedly trapped Labor was not just the ambitions of its cash splash but a revenue base that had become heavily reliant on an unstable corporate tax base after the big personal income tax cuts of the previous decade.

From when the global financial crisis hit in 2008,
Wayne Swan
regularly emerged to announce yet another collapse in the revenue, further eroding the bottom line, Labor’s chance of getting back to surplus and its economic credibility.

In opposition, the Coalition rarely conceded the revenue problem. It was too busy attacking Labor’s spending or its new taxes. But when senior ministers in the new government opened the incoming briefs from their bureaucrats in September last year, the revenue problem was suddenly all theirs. Treasury’s brief lingered on the ongoing revenue problems. It focused too on the dilemmas of forecasting the terms of trade and of dealing with the consequences of it turning against Australia.

For the small group of ministers and staffers who would be responsible for structuring the Abbott government’s first budget, the prospect of a revenue base that was likely to continue to deteriorate was the first sobering piece of information to get to grips with.

Revenue for the looming budget year of 2014-15 had been forecast at $411 billion – or 24.5 per cent of GDP – in the May budget. By the time the new government was putting together the midyear review of the budget, the revenue number for 2014-15 had dropped $23 billion to $387.9 billion or 23.8 per cent of GDP. And that was just the forecast for one year.

However, the Coalition had other, equally important, adjustments to make.

For six years, it had been relentlessly attacking Labor and continued to do so in its early months in government. The midyear budget review was supposed to be where it drew a line in the sand on Labor’s sins and took responsibility for the budget. But it proved difficult for some to shift the mindset.

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As staffers started to plan the political ­tactics of the budget, the idea of a “deficit levy" first emerged.

End to entitlement

Why not impose a short-term tax you could blame on the former government? It was an idea which was to fade in and out of view, and morph over time until budget day.

This first budget would be important for ministers establishing their roles and their relationships with each other.

Joe Hockey
has long asserted himself as a partner of the Prime Minister rather than a subservient figure.

After three years in which
Tony Abbott
set the Coalition’s political agenda and on ­occasion locked it in to reckless policy positions, now was the time for the cabinet to find its feet and its voice.

Hockey went out early to set the themes of the government’s economic policy: infrastructure spending through the states, an end to the age of entitlement. The Prime Minister did not always seem to be on the same song sheet.

But the relationship between the two men that has emerged from the budget process is a much tighter one than the always frosty relationship between
John Howard
and
Peter Costello
. Hockey and
Mathias Cormann
as Finance Minister have also formed a close partnership.

Hockey worked hard to set the direction for the budget. But the striking thing about how the government now speaks of this budget is of an Abbott budget, not a Hockey budget.

“It is ultimately him who will have to carry it," one senior source says. “He had to be comfortable with it."

Abbott’s various election commitments have heavily constrained what the government could do, but the Prime Minister’s involvement in the expenditure review committee has given him a day-to-day involvement in its decisions.

“The PM owns the politics. The Treasurer owns the numbers," says another source.

The seeds of the 2014 budget lie in the lead up to the midyear review of the budget (known as MYEFO) late last year.

The tight team in the Abbott and Hockey offices that put together the pre-election policy costings had carried over into government and was confident it knew the spending side of the budget inside out.

Spiders in the cupboard

But there will still some “spiders in the cupboard": decisions Labor had not nailed down and which therefore had not been included in the bottom line.

For example, there was the cost of voluntary redundancies for around 14,500 public servants and $1.2 billion of school funding not included because agreements had not yet been signed with some states.

The extent of these costs – as well as the revenue challenge – were crystallised as the MYEFO emerged.

Ministers considered their task when the Expenditure Review Committee of Cabinet (ERC) – chaired by Prime Minister Tony Abbott and comprising Treasurer Joe Hockey, Finance Minister Mathias Cormann, Deputy Prime Minister
Warren Truss
, Health Minister
Peter Dutton
and then Assistant Treasurer
Arthur Sinodinos
(until he stood down) – started to meet in earnest in late January and early ­February.

A revenue base of just 24 per cent of GDP put a bottom line on its spending, if the Coalition was to meet its ultimate high-level objective of a surplus of 1 per cent of GDP in a decade.

The level of spending estimated for 2014-15 in MYEFO was almost 2 percentage points above revenue at 25.6 per cent.

Work started on getting policy options costed. The key focus was on how to address the huge explosion of spending that was due to hit the budget in 2017. The challenge was to combine big long-term structural savings with relatively small changes in the four “official" years of the budget.

The first report from the Commission of Audit arrived on senior ministers’ desks in early February. The real significance of the commission’s work, according to a number of sources, was in putting the magnitudes of numbers in some perspective. It forecast spending could hit 26.5 per cent of GDP by 2023-24 compared to 23 per cent when the Howard government left office.

“Its real influence was in steeling people for the task they were confronting," one source observed.

“There was still a bit of a view afoot for some people that we could just fix the budget by cutting the public service headcount."

The themes in the commission’s report were consistent with the government’s. But in some areas, the budget reveals the government applying a very different policy ­prescription. Task forces were set up to examine individual policy areas and it was at this stage that it became clear the extent to which the budget was tightly controlled by just a handful of offices, often leaving portfolio ministers in the dark until late.

Focus was structural

Task forces on health, social welfare, industry and environment were set up, comprising officials from the Abbott, Hockey and Cormann offices, sometimes combined with their department officials, sometimes not.

The government did not start with a dollar target in mind for total savings, The focus was structural saves that represented good policy.

The idea of linking big cuts with clear rewards – as well as preparing the ground for a restructuring of federalism – emerged with ideas like a medical research fund being funded by the medicare copayment.

Equally, the decision to reimpose indexation on petrol excise was seen as a way of spreading a tax measure as broadly as possible while linking it in voters’ minds to the budget’s focus on infrastructure spending

The Coalition’s search for “structural" saves carried both the virtue and downside of starting “low and slow" but building over time.

But it became clear Cabinet wanted to get to surplus as soon as possible.

Even before it started cutting, the forecasts for the deficit were showing an improvement over the next four years – from a deficit of $47 billion in 2013-14 to $17.6 billion (or 1 per cent of GDP) in 2016-17.

The decision taken was that the deficit had to be cut in the short term, to reduce the public debt interest bill, even though the big structural saves kicked in from 2017 onward.

But it was felt to be “indecent" to impose 100 per cent of that on those who received government payments.

The task forces commissioned distributional analysis of the impact of decisions: how they would hit different family types and individuals and income levels.

Sources argue it was at this point the idea of a deficit levy came back into the frame – no longer simply a political stick with which to whack Labor – but a way of spreading the pain.

Meantime, spending decisions in areas like social services and health were signed off ­during a crucial few days in Perth at the beginning of April.

Cabinet had been due to meet in the west ahead of the WA Senate election rerun, before ERC ministers returned to Canberra to continue their budget deliberations.

But the Malaysian Prime Minister’s arrival in Perth to be briefed on the search for missing Malaysian Airlines flight 370 meant ERC ended up meeting in Perth over several days.

Discussions about revenue measures started after Abbott and Hockey returned from overseas trips in mid-April.

It was at this point the government started to see the bottom-line figures flowing from its decisions and had a chance to once again contemplate policy options it had initially rejected.

And there was some unexpectedly good news. Corporate profit figures confirmed that – for the first time in years – there would not be a further major deterioration in revenue figures.

Tony Abbott and Joe Hockey were able to construct their first budget on more solid revenue ground than had been seen in years.